NOt to Worry Inflation Russ!!!
Fed to Act as Needed to Thwart Inflation
Tuesday June 8, 1:14 pm ET
By Tim Ahmann
WASHINGTON (Reuters) - The Federal Reserve will do "what is required" to keep inflation in check if the forecast behind its view that interest rates can rise gradually proves wrong, Fed Chairman Alan Greenspan said on Tuesday.
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Greenspan, speaking to a group of bankers in London by satellite, suggested the Fed was prepared to act aggressively if needed to stem inflation, even as he restated the central bank's view that it could likely act at a "measured" pace.
"That conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead," he said. "Should that judgment prove misplaced ... the (Fed) is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability."
A feed of his remarks to the conference, where he was part of a panel with European Central Bank President Jean-Claude Trichet and Bank of Japan Deputy Governor Toshiro Muto, was made available in Washington.
The Fed has held overnight interest rates at a 1958 low of 1 percent since last June. But it is widely expected to bump them up by a quarter percentage point at the conclusion of its next meeting on June 29-30. Analysts expect that move to be the first step in a protracted rate-rise cycle.
Greenspan said financial markets have already been adjusting in anticipation of Fed action, contrasting the current period with the painful tightening cycle of 1994, when investors were caught off-guard by rate hikes.
Still, some in financial markets worry the Fed has waited too long on rates and think policy-makers may have to tighten credit more quickly than they now anticipate as a result.
U.S. bond prices slipped, the dollar rose and stock prices fell after Greenspan's remarks. Some economists said he sounded a bit more hawkish on inflation than other members of the Fed's policy-setting Federal Open Market Committee (News - Websites) have recently.
"He is certainly not stepping out of line with the FOMC's (News - Websites) stance but is choosing to emphasize a willingness to move more aggressively if circumstances require it," said Pierre Ellis, an economist at Decision Economics in New York.
BUSINESS COSTS RISING
Greenspan said a sharp recovery in U.S. business profits provided evidence of "the restoration of a significant degree of pricing power," which he said was also apparent in accelerating core inflation.
While he said competitive pressures should limit the extent to which businesses pass along higher production costs to consumers, he said high energy prices posed an inflation risk.
"To date, (those) cost pressures have been relatively subdued. Nonetheless, the persistence of the rise in energy prices is a worrisome element in the cost picture," he said.
U.S. light crude oil (CLc1) hit $42.45 a barrel last week, the highest in 21 years, but the price has dropped about $4 since then. Greenspan called the decline welcome, but said it was too soon to call it a trend.
"Higher oil prices, if they persist, are likely to boost core consumer prices, as well as the total price level, in this country," he said.
The core Consumer Price Index, which strips out volatile food and energy costs, has risen at a 3 percent annual pace over the past four months, a big pickup from last year's 1.1 percent gain, to cement expectations of Fed action.
Some Fed officials argue that the flare-up in core inflation is likely to prove largely temporary. Greenspan, answering questions before the banking group, made clear he was not abandoning the Fed's relatively benign outlook.
"Our view ... is for stable prices or close to stable prices for the period ahead," he said. "So far we have no reason to believe we will not be able to maintain a measured pace in the elimination of what we presume to be at this stage an unnecessary degree of accommodation."
While caution in corporate boardrooms and executive suites in the wake of a series of accounting scandals had lessened -- with hiring and capital spending on the rise -- Greenspan said it had not disappeared entirely.
"The very fact ... that we have a corporate sector which has been quite reluctant to move forward at an aggressive pace, means that we're not likely to get a surge in activity which will create a problem for us," he said. |
